Implementing T+1 Part Two: Challenges & Swift 20022 Overlap

With the T+1 compliance deadline just over a year away, having a clear implementation strategy is vital.

Like all implementations, T+1 comes with unique challenges that require financial businesses to reimagine their operational models and embrace digital innovation. These challenges become increasingly complex if an institution is still in the process of digital transformation and technology adoption.

To make matters even more complicated, Swift — a major provider of secure financial messaging services used by financial institutions around the world — is launching a new standardized approach for cross-border payment messaging and reporting in March 2023.

As a result, financial institutions must grapple with both T+1 and Swift implementations simultaneously.

In Implementing T+1 Part One, we discussed what T+1 settlement is all about, why switching to the T+1 model is advantageous, and when businesses need to have it implemented by.

Today, we are examining the other side of the coin by taking a closer look at the key challenges businesses are sure to face in the wake of these regulatory changes.

Recap: What is T+1 & When Do Businesses Need to be Compliant?

The SEC published its official final ruling for T+1 securities settlements in February 2023, changing the settlement timeframe for securities from two business days (T+2) to next-day settlement (T+1).

For businesses and firms subject to the new settlement standards, the compliance date is May 28th, 2024.

T+1 brings many potential benefits for securities settlements, including a faster and more-risk free settlement process. The initiative to switch from T+2 to T+1 is possible in part to the growing role of technology in the financial sector, as tech solutions are widely deemed a necessity for implementing T+1.

Regarding the main objectives of this ruling, the SEC states:

While the switch from T+2 to T+1 settlements is sure to bring numerous advantages along with it, it is also poised to present new challenges for financial institutions.

The 3 Key Challenges of T+1 Settlement for Financial Businesses

For investment firms and other financial service providers, several key challenges must be dealt with before a T+1 implementation can be carried out successfully.

Here are three challenges of T+1 settlement for your business to address:

1. Limited Time to Review Transactions

In the past, T+2 settlements provided investment firms the opportunity to validate a transaction and identify any potential errors over the course of two days.

The switch to T+1 settlement changes this timeframe, with firms now needing to identify any errors or risks on the trade day before the business reaches its end-of-day. This compressed timeframe can make a manual review of transactions all the more difficult, emphasizing the need for technical innovation.

To address this issue, firms must consider which technologies can take over manual tasks.

In general, two key technologies are needed to achieve this — automation and artificial intelligence (AI). By using automation and AI together, firms can not only remove the manual burden from the transaction review process, but also speed up the total time it takes to finish a review.

According to a May 2022 S&P Global Market Intelligence report:

Moreover, when paired with AI, automated activities can be informed by data gathered and assessed by AI programs. This makes automation even more powerful, giving it the capabilities to make well-informed automated decisions and generate meaningful insights using business data.

2. Time Zone Complications

While the T+1 settlement ruling is U.S. specific, it still has a global impact.

T+1 settlements can affect trading for firms and individual investors who are located outside the U.S. Like the issue surrounding transaction reviews discussed above, the shortened settlement time gives those outside the U.S. operating in different time zones less time to catch up before settlements are due.

For example, imagine a business that uses both an asset manager and a custodian to manage its stocks and other investment assets. Now, imagine that the asset manager is based in the U.S., while the custodian is based outside of the U.S. If the asset manager waits until the last minute to send through settlement instructions, it may already be too late to access the market where the custodian is located.

This is just one scenario of many that can complicate the T+1 settlement process.

In terms of resolving this issue, the solution likely lies in finding a partner — such as a FinTech or other financial services provider — that has offices in multiple locations around the world. As T+1 has the potential to cause communication problems due to time zone differences, having a partner with nearshore offices can be crucial for alleviating these communication clogs.

3. Insufficient Operational Capabilities

Overall, the biggest challenge that businesses are likely to face as T+1 settlement comes into effect is simply not having the right operational capabilities to support this shortened settlement time.

As regulators have emphasized, technology and digital innovation will play a vital role in T+1 implementations. Without the right approach to technology or digital transformation, businesses can end up lacking the necessary resources to execute T+1 securities settlements.

Rather than focusing on solution-specific technologies as many financial businesses have in the past, T+1 settlement will drive the need for a fully transformed business model and digital infrastructure.

The Overlap of T+1 & Swift ISO 20022 Implementations

Swift is a provider of secure financial messaging services that are used for a variety of purposes, including sending and receiving money transfer instructions. It is through Swift that financial institutions and other financial service providers primarily communicate regarding various transactions.

In March 2023, Swift is launching ISO 20022 — the latest iteration of Swift technology that provides a global and open standard for payments worldwide. ISO 20022 comes with many benefits, including:

Although the official launch date is in March of this year, implementations of ISO 20022 began in August 2022. As a whole, ISO 20022 is intended to help simplify cross-border payments and reporting (CBPR+), while also further analyzing and validating the impacts of the initiative of CBPR+.

In terms of how Swift’s ISO 20022 launch and the upcoming T+1 settlement implementation overlap and interact with each other, there are both advantages and challenges to be had.

On the positive side, once an institution or firm implements ISO 20022, communicating with business partners located in different time zones will be much simpler. Moreover, ISO 20022 enables greater use of key technologies, such as automation, which are needed to successfully implement T+1.

However, on the negative side, the proximity of these two implementations to one another can put a large technical strain on businesses. When planning for these implementations, businesses will need to consider how they can strategically coordinate resources and talent without overburdening their teams.

The Need for Strategic Resourcing in T+1 Implementations

When planning how your business can meet the challenge of both T+1 and Swift ISO 20022 implementations, the crucial component to consider is strategic resourcing.

The fact of the matter is that — unless your organization has been working for many years towards becoming a digital-first entity — you are likely still in the midst of other digital and technology implementations. In turn, to ensure a successful T+1 implementation, your business has three options to choose from:

Final Thoughts: Exadel Can Help Your Firm Implement T+1 & ISO 20022

When looking for a strategic resourcing partner you can trust, choose Exadel.

Our team is composed of financial services experts who understand the complexities of implementations. We have a wide range of services that can support your business throughout the implementation process, including services for regulatory compliance, staff augmentation, and robotic process automation.

Plus, Exadel has many strategic locations positioned in North America, South America, Europe, and Asia, giving your business the necessary access to nearshore offices in your exact time zone.

Though the compliance deadline for T+1 implementations is still over a year away, now is the time to start adopting ISO 20022 and planning ahead for the upcoming switch to T+1 settlement.

Talk to the Exadel team today to learn more about our services for implementation and ongoing support.